EQUILIBRIUM,MRS ,COST MINIMIZATION,ISOQUANT CURVE,LAW OF DIMINISHING

As we seen how supply and demand together  determine a market 's equilibrium.

in our daily life for every work there are certain algorithm to make a work successful 

so far,

analyzing change in equilibrium are there 3 step generally so for the market equilibrium,which in turn determine the price and quantity of good that buyer purchase and seller produce . the equilibrium price and quantity depend on the position of supply  and demands curves.when some event one of these  curves, the equilibrium  in the market changes ,resulting in a new price and a new quantity exchange between buyer and seller.

·        when analyzing how some events affects  the equilibrium in a market ,

we proceed in three step:-

• first:- we have to decide whether  the events shift the supply to the curve the demand curves,or,in  some case ,both curves.
• second :- we have decide whether the curve the shift to right or to the left .
• third :- we use  the supply and demand diagram to compare in the initial and the new equilibrium 

which show how the shift affects the equilibrium price and quantity 

Consumers and producers react differently to price changes. Higher prices tend to reduce demand while encouraging supply, and lower prices increase demand while discouraging supply.

example

good to maximise  their total utility. This will occur where

The consumer will consider both the marginal utility MU of goods and the price.

In effect, the consumer is evaluating the MU/price.

This is known as the marginal utility of expenditure on each item of good.

Example of marginal utility for Goods A and B

Units	MU good A	MU Good B
1	40	22
2	32	20
3	24	18
4	16	16
5	8	14
6	0	12

M

·         Suppose the price of good A and good B was £1.

·         Then the optimum combination of goods would be quantity of 4.

·         Because at quantity of 4 – 16/£1 = 16/£1

  

• MRS

 marginal  rate of substitution

A measure of number of unit that must be given up per unit of the x added so as to maintain to a constant level of utility

MRS=slope

(MU_F/ MU_C)

 COST MINIMIZATION SUBJECT TO GIVEN OUTPUT

Cost minimization is a basic rule used by producers to determine what mix of labour and capital produces output at lowest cost. In other words, what the most cost effective method of delivering goods and services would be while maintaining a desired level of quality.

An essential financial strategy, it is important to understand why cost minimization is important and how it works. 

EXAMPLE

• An isoquant is a firm’s counterpart of the consumer’s indifference curve. An isoquant is a curve that shows all the combinations of inputs that yield the same level of output. ‘Iso’ means equaland ‘quant’ means quantity. Therefore, an isoquant represents a constant quantity of output. The isoquant curve is also known as an “Equal Product Curve” or “Production Indifference Curve” or Iso-Product Curve.”

The concept of isoquants can be easily explained with the help of the table given below:

Table 1: An Isoquant Schedule

Combinations of Labor and Capital	Units of Labor (L)	Units of Capital (K)	Output of Cloth (meters)
A	5	9	100
B	10	6	100
C	15	4	100
D	20	3	100

The above table is based on the assumption that only two factors of production, namely, Labor and Capital are used for producing 100 meters of cloth.

Combination A = 5L + 9K = 100 meters of cloth

Combination B = 10L + 6K = 100 meters of cloth

Combination C = 15L + 4K = 100 meters of cloth

Combination D = 20L + 3K = 100 meters of cloth

The combinations A, B, C and D show the possibility of producing 100 meters of cloth by applying various combinations of labor and capital. Thus, an isoquant schedule is a schedule of different combinations of factors of production yielding the same quantity of output.

An iso-product curve is the graphic representation of an iso-product schedule.

•  'Law of Diminishing Marginal Returns'
•  The law of diminishing marginal returns states that, at some point, adding an additional factor of production results in smaller increases in output.
• 
  
•   For example, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.